Outside Audit Warns Santa Monica City Might Not Be Able to “Absorb” Coming Recessions

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Harding, Larmore
Kutcher & Kozal, LLP

By Niki Cervantes
Staff Writer

February20, 2018 -- With high personnel costs and record unfunded employee pensions equaling more than two thirds of its operating budget, the City of Santa Monica might not be able to “absorb” the fiscal shock of future recessions, according to the findings of an outside auditor.

The report by Moss Adams, which goes to the two City panels this month tasked with studying City Hall compensation, recommends the City develop “financial and operational strategies,” to cope with financially hard-times in the future.

With a diverse tax base, Santa Monica survived the 2008 recession without the cuts in staffing and efficiency measures other cities imposed to stay afloat, Moss Adams said.

But the future could be different for the City without a change in approach, the audit suggests.

It details the rising cost of “unfunded liabilities,” or the amount the City owes for employee pensions which is does not have in its coffers.

Soaring public pension costs, and the impact on taxpayers -- a problem rippling throughout California and elsewhere in the nation -- is highlighted in the Moss Adams analysis.

Of the 11 other peer cities Moss Adams included in the analysis of City operations, some of Santa Monica’s neighbors had it worse.

In Torrance, unfunded liabilities totaled $374 million, or 125 percent of its $299 million operating budget for 2016-2017.

The City of Inglewood’s unfunded pension costs totaled $227 million -- 220 percent of its $103 million operating budget.

Redondo Beach’s almost $130 million cost for unfunded pensions was 155 percent of its $83.8 million operating budget. And El Segundo’s unfunded liabilities were 89 percent of operating costs.

Anaheim was in the best shape, or 22 percent of total operating costs.

The report, which is in final draft form, goes to a joint February 28 meeting of the City’s Audit Subcommittee and the Compensation Study Advisory Committee, an ad hoc panel under the subcommittee’s supervision.

Some members of the advisory committee -- which includes City Hall outsiders -- are calling on the City to impose hiring and/or salary freezes and are critical of the City’s approach to paying down its mounting unfunded liability by stretching it over 30 years.

The bosses on the Audit Subcommittee are mostly mute on the subject.

The audit was ordered amid a rising chorus of complaints about the high costs of personnel in Santa Monica, especially as the City -- like others in California -- brace for an economic downtown expected to yield red ink soon.

Moss Adams notes Santa Monica survived the 2008 Great Recession in better fiscal shape than many other localities, which tackled employee expenditures -- typically the largest cost of government budgets -- with staffing cuts and tactics like outsourcing.

The analysis recommends that the City “explore strategies for mitigating personnel costs, such as hiring personnel at lower steps, and leveraging training programs to equip personnel to take on greater responsibility earlier in their career.”

The analysis found that compensation for lower-level employees is average among peers but the highest for management personnel.

The City’s full-time workforce totals 2,293 people.

In general, “Santa Monica has a higher workload, higher costs and comparable per-productivity than peers,” the report said.

Auditors said Santa Monica employs more personnel than peer cities, in part, “because it operates a variety of unique service offerings and responds to the service needs of a significant tourist population.”

Santa Monica's population of some 94,000 doubles with more than 90,000 daily commuters, and an estimated annual visitor population of 7.5 million.

“Santa Monica’s community has a number of unique characteristics compared to the average municipality," the analysis said. "The City’s population fluctuates significantly from day to night, between seasons, and during holidays.

“Population fluctuations impact the response of the City’s public safety, public landscape, and transit services. Santa Monica’s planning and development process is also more complex and rigorous than other cities, given the City’s unique environmental considerations and community development priorities.

“Overall, the City delivers programs and services beyond a typical full-service City, including infrastructure (airport, pier, cemetery, public Wi-Fi, community broadband, beach, regional bus service) and community programs (arts and community non-profit grant programs, housing assistance, public interest law, mobility).

The report will be reviewed at a joint meeting of the Audit Subcommittee and the Compensation Study Advisory Committee on February 28 at 6 p.m. in the Santa Monica Institute Training Room, 330 Olympic Drive, on the 2nd Floor, or Plaza Level.